CJEU insurance premium tax ruling bad for business and EU policy, says expert

Out-Law Analysis | 24 Apr 2013 | 3:02 pm | 2 min. read

OPINION: A European court ruling on the way insurance premiums are taxed will not only burden insurers with increased costs and extra work but will undermine the EU's attempts to create a single market for insurance. 

Insurers' systems and processes will need to be revised at a time when they are already under pressure because of the Solvency II reforms to the way they calculate risk and decide how much capital to hold.

In a case involving Dutch insurer RVS Levensverzekeringen NV the Court of Justice of the European Union (CJEU) ruled earlier this year that the insurance premium tax to be paid should be determined by where the insured person is located when the premiums are paid rather than where they lived when the contract was first concluded.

This means that insurers will have to establish and monitor the location of the policy holder during the life of the policy, and will have to find ways to gather contemporaneous location data for the policy holder.

Insurers will have to use this to determine what premium tax should be paid and might have to deal with policy premiums paid by instalments where the policy holder changes location during the life of the policy.

This is a burden on the systems that insurers use and may even require the wholesale re-drafting of contracts with consumers to make the gathering and processing of this information possible.

This all represents an unwelcome additional burden at a time when the insurance industry in EU is preparing for the impact of Solvency II, a draft EU Directive (155-page / 3.7MB PDF) which sets out stronger risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities.

RVS Levensverzekeringen is a Dutch insurer whose customers were based in the Netherlands. When some moved to Belgium the Belgian state claimed that the cover should be taxed in Belgiumrather than in the Netherlands. RVS Levensverzekeringen said that it was due in the country where the insured person lived when the contract was concluded.

The CJEU said that the 'habitual residence' of the insured people, which is the legal test of location for life assurance commitments established by EU Directives, could change, and that the tax was due on the basis of their place of residence at the time that the premium was due, not locked at the country of residence at the time of the contract conclusion. This is called the 'dynamic interpretation' of the law.

The CJEU said that this makes competition more effective in the EU because it takes tax out of the equation as a competitive factor in their choice of insurer - they can choose a domestic or foreign insurer and know that the same premium tax will be due regardless of which they choose.

In fact, though, it is likely to undermine the European Union's single market policy because it will make it more difficult and more expensive for insurers to offer cross-border insurance services. The European Commission's policy has been to encourage the provision of insurance both domestically and in other EU member states. But as the CJEU advisor Advocate General Kokott recognised in her opinion in the case, the CJEU's approach has the opposite effect.

She said that the increased uncertainty of tax treatment along with the added burden of collecting location information during the lifetime of the contract inherent in the dynamic interpretation would actually reduce the cross-border provision of services and so hinder the EU Treaty freedoms of establishment and provision of services.

The decision will hamper insurers' attempts to serve non-domestic markets and adds unnecessary costs to their operations at an already difficult time.

Darren Mellor-Clark is an indirect tax expert at Pinsent Masons, the law firm behind Out-Law.com